Falling like a ton of bricks

After 15 years of continuous growth, the housebuilding industry is coming apart. With his company's shares down 90 per cent, Mark Clare, boss of Barratt, tells Nick Mathiason he suspects a 'short-selling conspiracy' - but hints he needs to raise cash

Falling like a ton of bricks

After 15 years of continuous growth, the housebuilding industry is coming apart. With his company's shares down 90 per cent, Mark Clare, boss of Barratt, tells Nick Mathiason he suspects a 'short-selling conspiracy' - but hints he needs to raise cash

After what has probably been the worst week in his business career, Mark Clare, chief executive of beleaguered housebuilder Barratt, said: 'I look in the mirror and say, "What else should we be doing that we're not?"'

It would be understandable if the reflection staring back were drained of colour. After all, the most famous name in British housebuilding, with enough land to build 130,500 houses, has lost more than 90 per cent of its value in just over a year. Last week, traders accelerated its plight, savagely selling shares - 75 million were traded in a single day. The stampede had halved its price in two weeks as stories circulated that the builder required a £1bn cash injection to stave off bankruptcy. Last Wednesday, a £4.7bn company just 15 months ago was at one point worth just £280m.

The maelstrom forced Clare, after 48 hours of 'constant dialogue' with the firm's joint brokers, UBS and Credit Suisse, to issue a statement to the stock market, its second in three weeks. 'We got to a point where you can't let this company blow in the wind,' he said. 'You have to deal with rumours quite sharply.'

Clare, 50, suspects that Barratt is the victim of a 'short-selling conspiracy'. He feels the volume of trades is reminiscent of the trading allegations that hit HBOS shares last April. The Financial Services Authority is now monitoring share trades in builders. 'It's not great seeing price becoming disconnected with the business,' Clare says, who is confident that the underlying business is sound. 'It has a demotivating effect.'

Yet the entire building sector has been pulled down in Barratt's wake. Analysts from blue-chip banks fired off a series of devastating sell notes warning of massive land price write-downs. With the number of house sales more than halving, housebuilder revenues have shrivelled and the sector is axing thousands of staff. The knock-on effect to suppliers, retailers and the wider economy is potentially catastrophic.

To Clare, in the eye of a vicious storm, economic conditions are unprecedented. Some say he should have seen it coming - the building sector had enjoyed 15 years of uninterrupted growth, with margins on each house sold rising to more than 20 per cent. Prior to the credit crunch, Clare says he was preparing for a downturn, reducing costs and trying to ensure that the firm's marketing machine, described as the best in the sector, continued to make sales. But analysts see Barratt as the most vulnerable because it bought its smaller rival, Wilson Bowden, for £2.2bn at the peak of the housing market - just five months before the US sub-prime crisis sparked the most rapid withdrawal of credit in 60 years.

If he had it all again would he have bought the company? 'I'm glad we bought Wilson Bowden. It's a really great company. Would I have preferred to buy it for less? That and everything else, yes.'

Nevertheless, the City now believes that Barratt will be forced to write down its land so sharply that it will break covenants with its banks. Previously, a rights issue was anticipated to raise fresh capital to stave off a cash crisis, but with Barratt's share price so low it would not produce enough money. One City figure says: 'They're having to think of other arrangements, probably involving its banks. But what people are most concerned about is if any solution leads to a fire sale of assets, because of the effect on the rest of the sector.'

Clare has hinted there may be a need for a cash-raising exercise. 'I'm not suggesting this is easy. We have very tight covenants. We have seen sale levels reduce 50 per cent... If we feel we need to raise additional finance, that's what we will do.' Clare says the share price collapse assumes a 'massive write-down' on its land assets, which if reflected in house price sales would mean the land would be worthless.

In its statement last week, the company said it was on course to build 18,300 homes this year and make profits of £395m, had £2.6bn of committed bank facilities and net debt on target to be £1.7bn, in line with previous statements. Visits from prospective buyers are just 15 per cent down on last year, giving Clare encouragement that there is demand. Surprisingly, Barratt is still buying land for development.

After Barratt, the next most vulnerable builder is Taylor Wimpey, merged last year in an all-share deal and exposed to the United States and Spain, where market conditions are worse than the UK.

Persimmon and Redrow have also suffered similar sell-offs. But for one boss of a top UK housebuilder, the current malaise will prove to be an over-reaction. 'I suspect in a year or two we will say how cheap the shares are. It's going too far in one direction,' he said. 'You could argue we should have seen it coming, but there was a lot of money thrown at the industry that should not have been.'

Unlike in the recession of the Nineties, there is not a huge oversupply of houses. In fact, there is a shortage, owing to a rising population and a surge in prices that has put homes beyond the reach of hundreds and thousands of potential buyers, particularly in the south east.

One market where there is oversupply is in city-centre flats, especially in the north. But industry leaders argue they were just reacting to government demands: 'John Prescott wanted city centres revitalised. We did what we were told,' says one.

As builders pull out of new home schemes all over the country, the prospect of housing targets - 240,000 a year - being met are in tatters. Last year there were 170,000 homes built; this year, it could be fewer than 100,000.

But once the credit crunch is over there is sure to be a pent-up demand for homes. It is this that is luring cash-rich sovereign wealth funds and some private equity giants to closely monitor the housebuilders' stunning share collapse. As the credit crunch develops into a full-blown housing crisis, the odds are that they will pounce, buying up builders on the cheap - a tactic Barratt might well have been wise to have followed.

Foundation stone

Self-made millionaire Sir Lawrie Barratt founded the UK's most famous housebuilder in 1958, after building his own first home. In its 50 years, Barratt has built and sold over 300,000 homes - more than one in 70 of all dwellings in England and Wales. At 80, Sir Lawrie is life president and a significant shareholder of the firm.

In 1991, the former accountant was forced out of retirement to rescue his company. He sacked leading directors and parachuted in new ones. Six years later he retired for good.

Until last year, Barratt had grown through 'organic' land acquisition rather than taking over companies. This policy was overturned in February 2007 when it bought Wilson Bowden for £2.2bn, a decision now at the root of its crisis.